Euro Weekly 7 September 2018

Despite some major stats on the UK economic picture being released this week, it was once again Brexit that caused the most movement in the pound. The UK’s economic growth held steady at 0.4% and indicated the possibility of a faster pace of growth towards the end of the year. However, a breakdown of the stats showed that the picture isn’t rosy everywhere. Activity in the UK’s services sector rose in August to 54.3 from 53.5 according to survey by HIS Markit and the Chartered Institute of Procurement and Supply but this was the one spot of good news, albeit significant given the prominence of the service sector in the UK economy. Growth in the UK construction sector slowed to 52.9 in August while manufacturing eased to 52.8. None of this had little impact on the pound, which remains more vulnerable to the slings and arrows of Brexit negotiations. Michel Barnier proposed a backstop that would mean NI staying in the EU customs unions, large parts of the single market and the EU VAT system but this was rejected by the UK government. In news that was more positive for the pound, Germany are said to be ready to accept a less detailed agreement on the UK’s future economic and trade ties with the EU in a bid to get a Brexit deal done. The only other element influencing the pound this week was the variety of news from the Bank of England, sending the pound both up and down as sentiment dictated.

Inflation reports from the BoE shook GBP markets, but Mark Carney’s hints that he may extend his tenure to provide some continuity throughout Brexit were taken as a positive.

It was mostly quiet on the euro front, but the currency was slightly weighed down by indications that Euro zone economic growth will be modest at best over the coming year, according to a Reuters poll of economists who unanimously said the trade war between the United States and China threatens the outlook. The forecast looks steady at 0.4% every quarter through to the end of 2019 according to the poll, but there are some suggestions that growth is losing momentum and could be further impacted if a trade war between the United States and China escalates further, hurting business and consumer sentiment and keeping financial markets on edge.

The dollar consolidated near a one-week high against a basket of currencies on Monday as tensions around global trade and a continued selloff in emerging markets fuelled demand for the greenback. However, it may be that at some point that the fallout from the turbulent presidency of Donald Trump has an impact on the dollar, with criminal proceedings and investigations into key figures in the Trump camp ongoing and the US Mid-Terms looming, which could see the Republicans lose control of Congress and provide a very different political landscape going forward.

After some tough weeks, the Canadian dollar strengthened against the greenback towards the end of the week. The Bank of Canada left its policy rate on hold at 1.5% and left the Loonie at seven-week lows but recovered after a senior Bank of Canada official said the central bank had discussed the pace at which it could raise interest rates. Senior Deputy Governor Carolyn Wilkins pointed to some possible hope on the horizon after confirming that there has been discussion of whether the Bank’s gradual approach to raising rates remains appropriate.

The Australian dollar recently fell to a 27-month low against the US dollar this week after the decision by the Reserve Bank to maintain the current interest rate. Coupled with political uncertainty, a slowing of jobs and growth and the looming impact of the US/China trade war, the Aussie is also struggling against sterling. The kiwi dollar appears to be also caught up in the mix as the pound surges ahead on a wave of positive Brexit rhetoric.